Listed companies will soon have new disclosures to make, writes Henri Eliot, chief executive of Board Dynamics, which provides advice on board composition and corporate governance.
Subject to the Financial Markets Authority's approval, the NZX will be asking listed companies to disclose how many women they have on their boards. This will be applied to the annual reports of companies with a balance date on or after December 31. For any company, be it small or large, a board should be there to support and challenge management when making crucial business decisions.
What kind of diversity is important in any board, no matter whether it is a NZX company or an independent one?
The key elements are gender, skill set and ethnic diversity. Studies have shown a range of diversity in the boardroom improves effective governance because the individuals more readily challenge the status quo. Diversity is also important to ensure shareholders' interests are protected. Future boards will need to be well-represented with the relevant skills and technical expertise if they are to compete at an international level.
What do you think of this move by NZX? How does it compare to what is happening overseas?
It's a good start by ensuring transparency around gender diversity. But boards also need to have skill-set diversity and well-trained board members who clearly understand their role as a director, which is to protect capital and grow shareholder wealth. In Europe, they have approached gender diversity through a quota system. My concern is that we are starting to see decisions on board composition being based solely on gender as opposed to fit-for-purpose experience. My belief is that it's not just an issue of gender, but the lack of skill-set diversity within New Zealand boards.
What else could companies do to make their boards more dynamic?
It is imperative not to let nepotism rule by choosing to elect people from exactly the same background and peer group to a board. Board performance depends on how deep each director's knowledge of the organisation is, not how connected they are with other board members.
If the company wants to achieve a certain level of engagement with the CEO, the chair must also have related industry experience. Understanding the core drivers of value in a business is a very important element because related sector skills enable a board to detect trouble or under-performance at an early stage. Good operational business judgment at a board level is also necessary to the all-important trust and partnership relationship between a board and the CEO.
To improve governance, companies also need to move to a model of professional directorships where board services are the primary occupation of independent directors.
Directors should be changed every three to four years, but not all at once to maintain continuity of knowledge and experience. This keeps the board's thinking current and dynamic.
What impact is it having on NZX companies who don't have the appropriate diversity?
Without appropriate diversity, NZX companies will become stagnant and provide no real value in the protection of shareholders' interests or in challenging the CEO. The recent finance company bankruptcies are clear examples of poor governance where the boards overseeing these companies lacked either diversity or independence.
Name a NZ company which has a truly diverse board - what does it look like?
There are too few examples in New Zealand but the newly formed Chorus board of directors appears to have the right mix of skill and gender diversity. It has equal male and female gender representation complemented by diverse skill sets.
The board was selected following an internally managed search process, as opposed to using an external search firm.